Does the Political Promotion of Local Officials Impede Corporate Innovation?

This study investigates the impact of government officials' political promotion on the innovation of local firms in China. We find that local firms tend to avoid risky long-term investment in innovation when local government officials are conservative and short-term-oriented during promotion tournaments. Causality is established using the Chinese cities' Air Quality Index (AQI) to construct the instrumental variable of local politicians' promotion incentives. We further show that such negative effect is highly significant in state-owned enterprises, firms with political connections, and firms located in low-marketization regions. Our results are robust to a variety of model specifications and subsample analyses.